Reserve Bank governor Graeme Wheeler fired a warning shot across the bow of the foreign exchange market this morning, pointedly reminding it of his power to intervene if the kiwi dollar continued to climb while export commodity prices were falling.

In a speech to a dairy industry conference Wheeler said an important factor in the currency's strength had been the strengthening in the terms of trade to the most favourable mix of export and import prices for 40 years.

But recently the two have parted company with the currency continuing to rise despite a string of falling dairy prices at Fonterra's fortnightly auctions.

Wheeler reiterated the bank's view that the exchange rate is overvalued and its current level unsustainable.

"Our exchange rate could be expected to weaken if one or more of the following occurs: the US economy continues to improve, global dairy prices continue to come off their recent highs, China's growth slows; financial market volatility begins to rise, or if there is a global 'risk off' event such as a correction in global equity prices," he said.

"If the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars."

But ASB chief economist Nick Tuffley said intervention would have its challenges.

"The Reserve Bank is in the midst of a tightening cycle, with a widespread expectation of another 150 to 200 basis points of official cash rate increases yet to come. Any attempts at intervention will be fighting the underlying interest rate story, notwithstanding the bank's observation that the interest rate cycle is fully priced in and that some analysts believe there is considerable downside risk to the New Zealand dollar."

In a speech last year Wheeler said that in assessing whether to intervene in the exchange market, the bank applied four criteria. "These are whether the exchange rate is at an exceptional level, whether its level is justifiable, whether intervention would be consistent with monetary policy, and whether market conditions are conducive to intervention having an impact," he said.

"We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet, rather than attempt to influence the trend level of the Kiwi. But we are prepared to scale up our foreign exchange activities if we see opportunities to have greater influence."

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Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.